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98 ❖ Chapter 4/The Market Forces of Supply and Demand
2. The signals that guide the allocation of resources in a market economy are
a.
surpluses and shortages.
b.
quantities.
c.
government policies.
d.
prices.
3. Who gets scarce resources in a market economy?
a.
the government
b.
whoever the government decides gets them
c.
whoever wants them
d.
whoever is willing and able to pay the price
4. There is no shortage of scarce resources in a market economy because
a.
the government makes shortages illegal.
b.
resources are abundant in market economies.
c.
prices adjust to eliminate shortages.
d.
quantity supplied is always greater than quantity demanded in market economies.
5. In a market economy, who or what determines who produces each good and how much is produced?
a.
the government
b.
lawyers
c.
lotteries
d.
prices
6. Which of these statements does not apply to market economies?
a.
Prices prevent decentralized decision making from degenerating into chaos.
b.
Prices coordinate the actions of millions of people with varying abilities and desires.
c.
Prices ensure that anyone who wants a product can get it.
d.
Prices ensure that what needs to get done does in fact get done.
7. Suppose the United States had a short-term shortage of farmers. Which mechanisms would adjust to remove
the shortage?
a.
The government would provide tax incentives to encourage people to become farmers.
b.
The government would subsidize the production of food.
c.
The prices of food and the wages of farmers would adjust.
d.
There are no mechanisms to remove the shortage.
Chapter 4/The Market Forces of Supply and Demand ❖ 99
8. Adam Smith suggested that an invisible had guides market economies. In this analogy, what is the baton that
the invisible hand uses to conduct the economic orchestra?
a.
the government
b.
prices
c.
subsidies
TRUE/FALSE
1. Prices allocate a market economy’s scarce resources.
2. In a market economy, supply and demand determine both the quantity of each good produced and the price at
which it is sold.
3. A market is a group of buyers and sellers of a particular good or service.
4. Sellers as a group determine the demand for a product, and buyers as a group determine the supply of a prod-
uct.
5. A yard sale is an example of a market.
6. A newspaper’s classified ads are an example of a market.
7. Most markets in the economy are highly competitive.
8. In a competitive market, the quantity of each good produced and the price at which it is sold are not deter-
mined by any single buyer or seller.
100 ❖ Chapter 4/The Market Forces of Supply and Demand
9. In a competitive market, there are so few buyers and so few sellers that each has a significant impact on the
market price.
10. In a perfectly competitive market, the goods offered for sale are all exactly the same.
11. In a perfectly competitive market, buyers and sellers are price setters.
12. All goods and services are sold in perfectly competitive markets.
13. If a good or service has only one seller, then the seller is called a monopoly.
14. Monopolists are price takers.
15. Local cable television companies frequently are monopolists.
16. The quantity demanded of a product is the amount that buyers are willing and able to purchase at a particular
price.
17. The law of demand is true for most goods in the economy.
18. The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the
good rises, and when the price falls, the quantity demanded falls.
19. The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the
good falls, and when the price falls, the quantity demanded rises.
Chapter 4/The Market Forces of Supply and Demand ❖ 101
20. Individual demand curves are summed horizontally to obtain the market demand curve.
21. Individual demand curves are summed vertically to obtain the market demand curve.
22. The market demand curve shows how the total quantity demanded of a good varies as the income of buyers
varies, while all the other factors that affect how much consumers want to buy are held constant.
23. The demand curve is the upward-sloping line relating price and quantity demanded.
24. If something happens to alter the quantity demanded at any given price, then the demand curve shifts.
25. A movement upward and to the left along a given demand curve is called a decrease in demand.
26. An increase in demand shifts the demand curve to the left.
27. A decrease in demand shifts the demand curve to the left.
28. A decrease in the price of a product and an increase in the number of buyers in the market affect the demand
curve in the same general way.
29. If a determinant of demand other than price changes, the demand curve shifts.
102 ❖ Chapter 4/The Market Forces of Supply and Demand
30. Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of ciga-
rette advertising on television are all policies aimed at shifting the demand curve for cigarettes to the right.
31. An increase in the price of pizza will shift the demand curve for pizza to the left.
32. If the demand for a good falls when income falls, then the good is called an inferior good.
33. When Mario's income decreases, he buys more pasta. For Mario, pasta is a normal good.
34. A decrease in income will shift the demand curve for an inferior good to the right.
35. An increase in the price of a substitute good will shift the demand curve for a good to the right.
36. If orange juice and apple juice are substitutes, an increase in the price of orange juice will shift the demand
curve for apple juice to the right.
37. If orange juice and apple juice are substitutes, an increase in the price of orange juice will shift the demand
curve for apple juice to the left.
38. Baseballs and baseball bats are substitute goods.
39. A decrease in the price of a complement will shift the demand curve for a good to the left.
Chapter 4/The Market Forces of Supply and Demand ❖ 103
40. When an increase in the price of one good lowers the demand for another good, the two goods are called com-
plements.
41. Cocoa and marshmallows are complements, so a decrease in the price of cocoa will cause an increase in the
demand for marshmallows.
42. If baked potatoes and sour cream are complements, then an increase in the price of sour cream decreases the
demand for baked potatoes.
43. A decrease in the price of baseball bats will decrease the demand for baseballs.
44. Most studies have found that tobacco and marijuana are complements rather than substitutes.
45. Most studies have found that tobacco and marijuana are substitutes rather than complements.
46. If a person expects the price of pumpkins to increase next month, then that person’s current demand for pump-
kins will increase.
47. The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a particular
price.
48. Price cannot fall so low that some sellers choose to supply a quantity of zero.
49. When the price of a good is high, selling the good is profitable, and so the quantity supplied is large.
104 ❖ Chapter 4/The Market Forces of Supply and Demand
50. When the price of a good is low, selling the good is profitable, and so the quantity supplied is large.
51. The law of supply states that, other things equal, when the price of a good rises, the quantity supplied of the
good falls.
52. The law of supply states that, other things equal, when the price of a good falls, the quantity supplied falls as
well.
53. A movement along a supply curve is called a change in supply while a shift of the supply curve is called a
change in quantity supplied.
54. An increase in the price of a product and an increase in the number of sellers in the market affect the supply
curve in the same general way.
55. If a higher price means a greater quantity supplied, then the supply curve slopes upward.
56. If something happens to alter the quantity supplied at any given price, then we move along the fixed supply
curve to a new quantity supplied.
57. A decrease in supply shifts the supply curve to the left.
58. Whenever a determinant of supply other than price changes, the supply curve shifts.
59. A decrease in the price of pizza will shift the supply curve for pizza to the left.
Chapter 4/The Market Forces of Supply and Demand ❖ 105
60. If the producers of canned green beans expect the price of canned green beans to increase in the future due to
an increase in demand, they may put some of their current production into storage and supply less in the mar-
ket today.
61. A decrease in the price of sugar will shift the supply curve for cookies to the right.
62. Individual supply curves are summed vertically to obtain the market supply curve.
63. The market supply curve shows how the total quantity supplied of a good varies as input prices vary, holding
constant all the other factors that influence producers’ decisions about how much to sell.
64. A reduction in an input price will cause a change in quantity supplied but not a change in supply.
65. An increase in the price of ink will shift the supply curve for pens to the left.
66. If there is an improvement in the technology used to produce a good, then the supply curve for that good will
shift to the left.
67. Advances in production technology typically reduce firms’ costs.
68. If a company making frozen orange juice expects the price of its product to be higher next month, it will sup-
ply more to the market this month.
69. When a seller expects the price of its product to decrease in the future, the seller's supply curve shifts left now.
106 ❖ Chapter 4/The Market Forces of Supply and Demand
70. Supply and demand together determine the price and quantity of a good sold in a market.
71. A market’s equilibrium is the point at which the supply and demand curves intersect.
72. At the equilibrium price, quantity demanded is equal to quantity supplied.
73. The equilibrium price is the same as the market-clearing price.
74. At the equilibrium price, buyers have bought all they want to buy, but sellers have not sold all they want to
sell.
75. The actions of buyers and sellers naturally move markets toward equilibrium.
76. When the market price is above the equilibrium price, the quantity of the good demanded exceeds the quantity
supplied.
77. When the market price is above the equilibrium price, suppliers are unable to sell all they want to sell.
78. In a market, the price of any good adjusts until quantity demanded equals quantity supplied.
79. A surplus is the same as an excess demand.
Chapter 4/The Market Forces of Supply and Demand ❖ 107
80. Sellers respond to a surplus by cutting their prices.
81. Price will rise to eliminate a surplus.
82. When quantity supplied exceeds quantity demanded at the current market price, the market has a surplus, and
market price will likely rise in the future to eliminate the surplus.
83. When the market price is below the equilibrium price, the quantity of the good demanded exceeds the quantity
supplied.
84. When the market price is below the equilibrium price, suppliers are unable to sell all they want to sell.
85. A shortage is the same as an excess demand.
86. Sellers respond to a shortage by cutting their prices.
87. Price will rise to eliminate a shortage.
88. When quantity demanded exceeds quantity supplied at the current market price, the market has a shortage, and
market price will likely rise in the future to eliminate the shortage.
89. Surpluses drive price up, while shortages drive price down.
108 ❖ Chapter 4/The Market Forces of Supply and Demand
90. A shortage will occur at any price below equilibrium price and a surplus will occur at any price above equilib-
rium price.
91. When a supply curve or a demand curve shifts, the equilibrium price and equilibrium quantity change.
92. Demand refers to the amount buyers wish to buy, whereas the quantity demanded refers to the position of the
demand curve.
93. Supply refers to the position of the supply curve, whereas the quantity supplied refers to the amount suppliers
wish to sell.
94. It is not possible for demand and supply to shift at the same time.
95. A decrease in demand will cause a decrease in price, which will cause a decrease in supply.
96. An increase in demand will cause an increase in price, which will cause an increase in quantity supplied.
97. An increase in supply will cause a decrease in price, which will cause an increase in demand.
98. A decrease in supply will cause an increase in price, which will cause a decrease in quantity demanded.
99. If the demand for movies increases at the same time as the movie industry adopts labor-saving technology for
producing movies, the equilibrium price for movies will increase, but the effect on the equilibrium quantity of
movies is ambiguous.
Chapter 4/The Market Forces of Supply and Demand ❖ 109
100. Suppose the demand for calendars increases in November. At the same time, the price of the ink used in the
production of calendars increases. In the market for calendars, the equilibrium price rises, but the effect on the
equilibrium quantity is ambiguous.
101. Suppose the demand for calendars increases in November. At the same time, the price of the ink used in the
production of calendars increases. In the market for calendars, if the size of the shift of the demand curve is
larger than the size of the shift of the supply curve, then the equilibrium quantity rises.
102. A decrease in the price of blueberries will decrease both the equilibrium price and quantity in the market for
blueberry muffins.
103. A decrease in the price of peanut butter will increase both the equilibrium price and quantity in the market for
jelly.
104. An increase in the price of blue pens will increase both the equilibrium price and quantity in the market for
black pens.
105. An increase in the price of cotton will increase the equilibrium price and decrease the equilibrium quantity in
the market for cotton t-shirts.
106. A decrease in the price of creamer will increase the equilibrium price and decrease the equilibrium quantity in
the market for coffee.
107. An increase in the price of maple syrup will decrease both the equilibrium price and quantity in the market for
pancakes.
108. In a market economy, prices are the signals that guide the allocation of scarce resources.
110 ❖ Chapter 4/The Market Forces of Supply and Demand
SHORT ANSWER
1.
a.
What is the difference between a "change in demand" and a "change in quantity demanded?" Graph
your answer.
b.
For each of the following changes, determine whether there will be a change in quantity demanded
or a change in demand.
i.
a change in the price of a related good
ii.
a change in tastes
iii.
a change in the number of buyers
iv.
a change in price
v.
a change in consumer expectations
vi.
a change in income
2.
a.
What is the difference between a "change in supply" and a "change in quantity supplied?" Graph
your answer.
b.
For each of the following changes, determine whether there will be a change in quantity supplied
or a change in supply.
i.
a change in input costs
ii
a change in producer expectations
iii.
a change in price
iv.
a change in technology
v.
a change in the number of sellers
Chapter 4/The Market Forces of Supply and Demand ❖ 111
3.
a.
Given the table below, graph the demand and supply curves for flashlights. Make certain to
label the equilibrium price and equilibrium quantity.
Price
Quantity Demanded
Per Month
Quantity Supplied
Per Month
$5
6,000
10,000
$4
8,000
8,000
$3
10,000
6,000
$2
12,000
4,000
$1
14,000
2,000
b.
What is the equilibrium price and the equilibrium quantity?
c.
Suppose the price is currently $5. What problem would exist in the market? What would you
expect to happen to price? Show this on your graph.
d.
Suppose the price is currently $2. What problem would exist in the market? What would you
expect to happen to price? Show this on your graph.
112 ❖ Chapter 4/The Market Forces of Supply and Demand
4. Fill in the table below, showing whether equilibrium price and equilibrium quantity go up, go down, stay the
same, or change ambiguously.
No Change in Supply
An Increase in Supply
A Decrease in Supply
No Change in
Demand
An Increase in
Demand
A Decrease in
Demand
5. Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the following
would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change.
a.
Winter starts, and the weather turns sharply colder.
b.
The price of tea, a substitute for hot chocolate, falls.
c.
The price of cocoa beans decreases.
d.
The price of whipped cream falls.
e.
A better method of harvesting cocoa beans is introduced.
f.
The Surgeon General of the U.S. announces that hot chocolate cures acne.
g.
Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.
h.
Consumer income falls because of a recession, and hot chocolate is considered a normal good.
i.
Producers expect the price of hot chocolate to increase next month.
j.
Currently, the price of hot chocolate is $0.50 per cup above equilibrium.
Chapter 4/The Market Forces of Supply and Demand ❖ 113
114 ❖ Chapter 4/The Market Forces of Supply and Demand
